Elliott Waves Say Dollar is Humpty Dumpty

Elliott Waves Say Dollar is Humpty Dumpty

The initial reaction to Friday’s lackluster US job’s number was to buy dollars. But, that didn’t last long, and by the close it seems that more traders are warming up to the idea that the Fed won’t be raising rates substantially, even if it does something in September. While the commodity smash is in full force, in part based on dollar strength, those people that expect the dollar rally to continue might be forgetting the signals that copper, energy and bonds are sending – that the global economy is in trouble.

Given colossal global debt levels we find it hard to believe that this Fed, which has failed to raise interest rates given six years of positive data, will tighten much harder than it already has. Keep in mind that ending QE is a “tightening” maneuver, as evidenced by risk asset reactions when QE1 & 2 were stopped. While we’d argue that the Fed needs to tighten and allow a recession to happen, that’s not part of the misguided Keynesian or Monetarist agendas. As a result, the US dollar will likely end up falling hard once the economy weakens, the Fed fails to hike and QE4 is back on the table.


GBPUSD daily chart
Triangle Still Operative Count

A rally failed to materialize, and RSI has turned back down from the 50 area, so caution is warranted. But, prices had a “false breakdown” below the red up trendline on Friday, and as long as prices remain above that level, we can consider it support.

GBPUSD 120-minute chart
Five Down Means a Bounce is Underway

More importantly is that we have a clear five wave decline from the wave (b) high. Under our top count, we consider the triangle for wave (B) complete, but even under a more bearish scenario, a bounce towards 1.5555 is due. A push back above the wave (b) high will cement this bullish view, and since it targets 1.6000 or so, traders don’t need to be aggressive yet. We’re bullish against Friday’s low, and a drop below that will turn us neutral as we await further evidence of a bottom. A drop below the wave C low would likely mean some other count was best, although even that wouldn’t completely eliminate the idea of a wave (B) triangle.


EURUSD daily chart
Above Trendlines Means Test of 1.1400 Underway

It doesn’t look like much on the daily chart, but Friday’s action was important. Not only did it hold Wednesday’s low, prices closed above the red down trendline and right at the longer term down channel line that has contained prices for over a year. People seem to be overly focused on Greece when it comes to pricing the euro, and we think they should be more focused on Germany, where its bonds are under extreme demand. We’ve Tweeted out several times the question, “Where would the $DEMUSD be trading at today?” There’s no doubt more default pain is coming in the EU, but that pain should be in the bond markets not the currency. We can count the action since the wave (W) high in three different ways, and all of those expect prices to exceed 1.1400.

EURUSD 120-minute chart
Action Down From 1.1118 is Corrective

What’s clear here is the corrective nature of the decline from 1.1118, into support at the 1.08 level. Keep in mind that that level has acted as support since May, and we continue to expect higher prices here. We are bullish against Friday’s low, anticipating a very bullish couple of weeks as long as that level holds. This could be a very impressive rally driven by short covering as those, “late to the Greece default party” are forced to cover.


AUDUSD daily chart
Above .7500 & an Important Low is In

The caption for this chart says it all. While the decline would count best with one more new low to complete C, some doubt has crept in that we’ll get it. I’m not near term bullish on AUDUSD, but above .7500, and we’ll be looking towards .8100, or higher.

AUDUSD 120-minute chart
The action up is overlapped

So, either way it looks like higher is the early week direction. Of course, there’s plenty of overhead resistance to doubt the fact that we’re going to simply blast higher here. We have put a wave (v) label at the low to suggest that the low is in with (v) being an ending diagonal. That would leave a super tiny (v) relative to (i) and (iii), though, so it’s a lower probability. The alternate count on the daily chart suggests a better “bullish” count, that will be activated on a push above the wave (i) low.


NZDUSD daily chart
Above Down Channel, Bears Beware

Are there any commodity, AUD or NZD bulls? They are few and far between, and our daily chart has a couple of loud warnings for them. First, the count from the wave B high is complete, although we can’t rule out one more final stab lower. But, the bullish divergence from above “Sustainable Bear” territory (lower grey zone) on Wednesday suggests otherwise, as does the push above the down channel line that has contained the entire rally since the wave B top. A push above the down trendline would leave room to the upside towards the wave iii of (iii) low near .7000.

NZDUSD 120-minute chart
Ending Diagonal or 1 More Low?

Here we’re showing the wave (v) complete count as an ending diagonal. Since we don’t have five up and three down from the wave C low yet, it’s a bit too early to know that this count is correct, but given our EURUSD and GBPUSD counts, it’s not out of the question that NZD has bottomed. We’re certainly not going to fight higher prices here.


USDCAD daily chart
Closer to a Top

The Canadian dollar still looks vulnerable. Not only that, but since wave 2 retraced a sharp 61.8% of wave 1, wave 4 should be of the flat variety per the guideline of alternation. And, we can’t rule out one last push up to complete wave 3 before the flat 4 begins.

USDCAD 240-minute chart
Corrective Action Down Leaves New Highs to Come

But, the top view is that wave 4 is already underway with a corrective bounce in (b) that should find resistance soon. The bearish divergence into the high concurs with this, although on both charts that occurred in the “Sustainable Bull” zone. The lesson here is that a push above last week’s high can’t be ruled out, although even that would likely be quickly reversed for wave 4.


USDJPY daily chart
Action Around Trendline Suggests Lower

The Wolf worked for a legend of Wall Street who used to say, “When the count isn’t clear, switch time frames until you see something clear.” For this reason, we’re not going to show the intraday chart for USDJPY, because the action isn’t any clearer there. In fact, we’re now favoring the red count which suggests the wave I high is in place, and that a potentially devastating decline is due in (C). We’re certainly early to be looking at a “devastating” collapse given the “Sustainable Bull” reading into the top. But, notice that prices have reversed back below the up trendline, and that the action up from the red wave B low is overlapped. That means that the near term trend is down per the red count, or per the wave (c) decline. Both point lower next week.

Our mentor would also say, “Don’t write about what you don’t know, only write about what you know.” But, when things aren’t particularly clear we think that’s information too. As it applies to USDJPY, the lack of clarity in a bigger picture suggests we look elsewhere for opportunities next week.


USDCHF daily chart
“Sustainable Bull” Reading & Channel Break

While it’s not at all clear how the rally from the January low fits into the larger picture, the near term action seems clear. The push above the base channel, and the “Sustainable Bull” reading suggests that any decline will be corrective and likely hold above the wave A high. In fact, higher in the near term makes sense before a pullback to retest the broken channel line. Then, a push to a diverging new high will likely present a bearish opportunity.

Happy Trading!

The Wolf

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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